Deciding how much to pay employees is an important part of your company’s competitive strategy. Paying workers too much may cut into profitability, but insufficient compensation can result in high turnover and poor morale. Relying on guesswork or the demands of individual job candidates can be risky. Resources that provide concrete data on the prevailing pay practices within your industry and region are often more useful in helping you to formulate an effective policy for recruiting, retaining, and motivating qualified workers.

 

More Than Dollars and Cents

There are a number of factors to consider when establishing pay scales, including the duties and expectations of each position, the availability of suitable candidates, the size and profitability of your business, and the competitiveness of your industry and local labor market. Reviewing salary data for specific positions within your targeted recruiting market is a useful starting point. The website of the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) features comprehensive data on compensation broken down by occupation, industry, and geographic area. You can also purchase customized surveys from compensation consultants and market researchers. Other potential sources of salary information include classified ads and professional associations.

In addition to collecting data on the pay rates and practices of similar organizations, it is essential to familiarize yourself with the legal requirements for employers in your state, including minimum wages, overtime pay, payroll taxes, and workers’ compensation insurance. Remember that wages or salaries generally represent only two-thirds of actual employee costs, with the remainder encompassing taxes and benefit costs.

Most full-time, permanent employees expect benefits as part of their compensation package. To start, health insurance is one of the most important benefits to employees. While providing health insurance is especially expensive for small businesses, some affordable options may be available. You may also offer a range of less costly benefits, such as a basic retirement plan, group life insurance, paid vacation, and access to flexible spending accounts.

 

Establishing a Compensation Structure

Before setting salaries or wages for individual employees, consider establishing a standard compensation structure for your organization. To begin, write down all the responsibilities and functions of each job. Using these job descriptions as a guide, rank each position from the lowest to the highest in terms of value to your business. Next, group positions that are similar in value to the organization and that demand roughly similar skill levels into a single grade. For each grade of positions, create a pay scale with a maximum, minimum, and midpoint wage or salary. In order to rise above the scale for an individual pay grade, employees can be expected to earn a promotion or take on additional responsibilities that place them in a higher grade.

The prospect of a raise or a bonus can keep workers motivated. Include criteria in your compensation structure for earning raises, which may be based on performance, seniority, or a combination of the two. Concrete and attainable goals for each employee can be set and discussed during regular performance reviews. Referring to these individual performance goals and your organization’s compensation structure may make it easier to explain your decisions regarding promotions, raises, and bonus awards.

Smaller businesses are frequently unable to match the pay and benefit levels offered by larger companies. Yet, smaller employers can make up for less generous compensation packages by providing workers with flexibility, responsibility, and a pleasant working environment. If you can’t beat the pay packages of larger competitors, you may be able to leverage your company’s strengths during the recruitment process by stressing the enhanced opportunities for attaining positions of responsibility that a smaller organization can provide, and by offering candidates a company culture in which individual contributions are recognized as essential to the success of the business.